New York City Comptroller John Liu, who campaigned for office pledging transparency in his supervision of municipal pensions, won’t provide records on $32 million in “organizational costs” that his biggest fund paid to money managers.
The $41.8-billion New York City Employees Retirement System, whose 347,000 members are the most of any U.S. municipal retirement fund, reported $28.8 million in such expenses for private-equity investments and $3.1 million for real estate in the fiscal year ending June 30, 2010. That’s enough money to pay almost 1,000 retirees their average annual pensions of $33,000.
Documents describing the payments “are derived from information from private-equity companies and real-estate partnerships which if disclosed would cause substantial injury to the competitive position” of the firms and therefore are exempt from New York’s freedom of information law, Phillip Hom, the comptroller’s records access officer, said in an Aug. 11 letter. Bloomberg News had requested details of the expenses.
Private-equity firms, which pool money from investors to buy companies, fix them and sell them for a profit, have sought to keep their business models hidden, even when working for pension funds that manage money for the public. At least 11 states have enacted laws limiting access to details about the firms’ tactics and portfolio companies, and in New York, the freedom of information law grants an exception for trade secrets, or proprietary business strategies.
“The organizational costs are start-up payments to each of about 100 private-equity funds in which the New York employees’ pension system invests along with other institutional investors, such as legal fees and travel expenses for managers,” Larry Schloss, Liu’s chief investment officer, said in an e-mail yesterday. “The costs are shared proportionately among the investors depending on the size of their commitment to each fund.”
Liu’s office wouldn’t detail the expenses or say whether placement agents -- middlemen who refer private-equity firms to pension funds and who have been at the center of scandals in New York and California -- got any of the money.
Liu’s decision to withhold specifics is ill-advised, said Arthur Levitt, a former chairman of the U.S. Securities and Exchange Commission. Inquiries about who received payments from the pension fund “are fair and legitimate,” he said.
“Municipal pension funds should operate in an environment of complete transparency,” said Levitt, a board member of Bloomberg News parent Bloomberg LP. “They represent the interests of thousands of municipal employees, many of whom are relatively unsophisticated investors. The public interest is served by the comptroller giving a response to such questions.”
While public pension funds hold back some details about private-equity firms they use, it’s unusual for a fund to break out such organizational payments as a separate category from management fees, said Tim Friedman, head of U.S. operations for Preqin Ltd., a London-based private-equity research firm.
“Is it an individual?” Friedman said. “Or is it a company? If it was an individual, God knows what’s going on.”
Many funds record such expenses as part of their private-equity management fees, and it’s unclear whether they would disclose them if asked. The other four funds Liu supervises don’t break out separate organizational costs.
Liu, 44, a Democrat, was elected after vowing to open the operations of the five New York City employee pension funds the comptroller supervises to public scrutiny. His pledges followed a scandal in which a former Democratic city and state comptroller, Alan Hevesi, admitted getting almost $1 million in payments and favors for himself and his friends from investment firms in return for hiring them to manage pension assets.
Liu banned gifts to comptroller’s office staff, mandated disclosure of contacts between investment managers and his employees and required firms to disclose fees paid to middlemen. He also created websites with information on city contracts and advocated webcasts of pension board meetings.
“The New York City pension funds have taken unprecedented steps toward increasing transparency and are now among national leaders in this area,” Michael Loughran, Liu’s spokesman, said in an Aug. 19 e-mail. “We remain committed to building on our achievements but will not release any information that is regarded as a trade secret, the disclosure of which could hurt the performance of the systems’ portfolio and, ultimately, city taxpayers.”
Loughran said the comptroller wasn’t available for an interview.
As of May 31, the five New York funds Liu supervises had $121 billion in assets, including $7.35 billion in private equity and $2.6 billion in real estate.
Liu’s refusal to divulge private-equity and real-estate payments isn’t the first time the comptroller has declined to make public information about the pension system’s actions. Only after Bloomberg News filed requests under New York’s Freedom of Information law did Liu disclose the identities of at least 10 money managers he fired for poor performance.
In response to one such request, the office disclosed in September 2010 that the fund had terminated Greenwich, Connecticut-based Breeden Capital Management, headed by former SEC chairman Richard Breeden, in May of that year. Liu didn’t want to embarrass the firms, his spokeswoman, Sharon Lee, said at the time.
Unlike funds in some states, New York City’s pension system doesn’t publicly post data on the performance of individual private-equity firms managing its assets. Liu has vowed to post those figures online by December 2012.
Robert Freeman, executive director of the New York State Committee on Open Government, said records on the pension system’s payments to private-equity and real-estate firms don’t qualify as trade secrets and must be disclosed under the freedom-of-information law.
“It’s painfully simple,” Freeman said. “In New York, and in all likelihood much of the rest of the nation, records that indicate how the government spends public money are public.”
Bloomberg News is appealing the comptroller’s decision to keep the information secret.
For the New York City Employees Retirement System, private-equity firms account for half of $175.3 million in investment expenses, while those firms managed just 7 percent of assets. The fund represents 347,000 clerks, accountants, social workers, corrections officers and sanitation workers.
In addition to the $28.8 million in organizational costs, the fund paid $58.8 million in management fees to 98 private-equity firms in the fiscal year ending June 30, 2010. These firms held $2.6 billion of the fund’s $35.4 billion in net assets.
New York’s four other funds represent teachers, school administrators, firefighters and police. The five city funds had $426.8 million in investment expenses in fiscal 2010, according to New York’s comprehensive annual financial report.
Not Enough Assets
New York’s pension program doesn’t have enough assets to cover its obligation to current and future retirees. To help make up the difference, the city will spend about $8.4 billion of its $66 billion budget this fiscal year, or one in five tax dollars, to pay pension benefits.
Citing these costs, New York Mayor Michael Bloomberg last year created a Pension and Investment Office in the city Finance Department, and appointed Ranji Nagaswami, a former fund manager with AllianceBernstein Holding LP, as its chief investment adviser. He chose Carolyn Wolpert, a former attorney in the city Law Department, as chief pension administrator.
Marc LaVorgna, a spokesman for the mayor and the pension officials, said Nagaswami and Wolpert weren’t available to discuss the comptroller’s decision to withhold information about the $32 million in costs. The mayor is founder and majority owner of Bloomberg LP.
Openness about the investments and costs of New York pension funds is especially important given the lack of market experience of the retirees who count on them, Levitt said.
“Because of the nature of that constituency, transparency is essential,” Levitt said. “Nontransparency leaves investors in the dark, and that is not constructive with respect to maintaining fair and open markets.”